Most applications of time-dependent density-functional theory (TDDFT) use the adiabatic local-density approximation (ALDA) for the dynamical exchange-correlation potential V(xc)(r,t). An exact (i.e., nonadiabatic) extension of the ground-state LDA into the dynamical regime leads to a V(xc)(r,t) with a memory, which causes the electron dynamics to become dissipative. To illustrate and explain this nonadiabatic behavior, this paper studies the dynamics of two interacting electrons on a two-dimensional quantum strip of finite size, comparing TDDFT within and beyond the ALDA with numerical solutions of the two-electron time-dependent Schrodinger equation. It is shown explicitly how dissipation arises through multiple particle-hole excitations, and how the nonadiabatic extension of the ALDA fails for finite systems but becomes correct in the thermodynamic limit.